Magni, Carlo Alberto (2005): Firm Value and the mis-use of the CAPM for valuation and decision making.
Download (123kB) | Preview
This paper shows that a decision maker using the CAPM for valuing firms and making decisions may contradict Modigliani and Miller’s Proposition I, if he adopts the widely-accepted disequilibrium NPV. As a consequence, CAPM-minded agents employing this NPV are open to arbitrage losses and miss arbitrage opportunities. As a result, even though the use of the disequilibrium NPV for decision-making is deductively drawn from the CAPM, its use for both valuation and decision should be rejected.
|Item Type:||MPRA Paper|
|Original Title:||Firm Value and the mis-use of the CAPM for valuation and decision making|
|Keywords:||Firm value, Free Cash Flow, CAPM, Modigliani and Miller’s Proposition I, Net Present Value, disequilibrium, arbitrage, decision making|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity
M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics
|Depositing User:||Carlo Alberto Magni|
|Date Deposited:||10. Feb 2008 17:41|
|Last Modified:||17. Mar 2015 06:11|
Bossaerts, P. and Ødegaard, B. A. (2001). Lectures on Corporate Finance. World Scientific Brealey, R. and Myers, S. C. (2000). Principles of Corporate Finance. New York: McGraw-Hill, 6th edition. Damodaran, A. (1999). Applied Corporate Finance: A User’s Manual. New York: Wiley. Dybvig, P. H. and Ingersoll, J. E. (1982). Mean-variance theory in complete markets. Journal of Business, 55(2), 233–250. Fernández, P. (2002). Valuation Methods and Shareholders Value Creation. San Diego: Academic Press. Kahneman, D., Slovic, P. and Tversky, A. (1982). Judgment under uncertainty: Heuristics and biases. Cambridge, UK: Cambridge University Press. Kahneman, D. and Tversky, A. (1984). Choices, values and frames. American Psychologist, 39, 341–350. Magni, C.A. (2002). Investment Decisions in the Theory of Finance: Some Antinomies and Inconsistencies. European Journal of Operational Research, 137/1, 206–217. Magni, C. A. (2007). Project valuation and investment decisions: CAPM versus arbitrage, Applied Financial Economics Letters, 3(1), 137–140, March. Modigliani, F. and Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48, 261–297. Nau, R. (1999). Arbitrage, incomplete models, and other people’s brains. In M. Machina and B. Munier, Eds., Beliefs, Interactions, and Preferences in Decision Making, Kluwer Academic Press. Nau, R. and McCardle K. (1991). Arbitrage, rationality, and equilibrium. Theory and Decision, 31, 199–240. Qualls, W. J. and Puto, C. P. (1989). Organizational climate and decision framing: An integrated approach to analyzing industrial buying decisions. Journal of Marketing Research, 24, 179– 192. Rao, R. (1992). Financial Management, MacMillan. Roszkowski, M. J. and Snelbecker, G. E. (1990). Effects of “framing” on measures of risk tolerance: Financial planners are not immune. The Journal of Behavioral Economics, 19(3), 237–246. Rubinstein, M. E. (1973). A mean-variance synthesis of corporate financial theory. Journal of Finance, 28, 167–182. Tversky, A. and Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453– 458.